Our economic and political leaders do not have much faith in the free market, or
in trickle-down economics, despite their apparent support for
both,
says
Ashwin Mahesh.

01 January 2004 -

In a country where the overwhelming majority of the people are poor, the
discourse on economic development is likely to be awkward even in good times. It
has been this way since the mid-1980s when Rajiv Gandhi's government first began
steering a course away from the License Raj and its shackles on
entrepreneurship. Liberalization - and its newer avatar, globalization - were
offered as tools by which to find economic gains, but with a caveat always
appended: that these tools must be used in a 'humane' way. The language of that
message solidified during the Narasimha Rao years, and remains at the heart of
economic policy today.

But are the particular tools chosen for economic progress inherently inhuman,
that they must be tempered to protect the well-being of hundreds of millions of
lower-income citizens? If the road to prosperity lies along ever more open
markets, why must we repeatedly hear cautious notes of social concern? Aren't
freer markets themselves sufficient assurance of better times, even for the
poorer classes?

By now, of course, most people - whether in rich nations or poor ones - can
point to plenty of grief from globalizing markets. The loss of manufacturing
jobs in the developed countries, and the recent migration of white-collar
positions previously thought unexportable, have alerted huge sections of the
populations of America and Europe to the downside in very personal terms. On the
other side of the trading fence, in places like Mexico, Brazil, China, or India,
while there is some celebration over the benefits of international trade, there
is alongside tremendous skepticism that this is merely a scheme for the already
privileged.

The lower-skilled, lower-wage citizens who form by far the majority of these
states do not experience the 'feel-good' factor that now surrounds their
wealthier brethren. The gap between haves and have-nots has widened in many
places, and migration of lower-income groups across provincial and national
boundaries appears endless. At an income of Rs.5000 a month, the median family
of five in Bangalore cannot afford decent shelter, health or education, and all
the optimism from market managers will not alter this for many years at least.

Yet, this is the heart of feel-good country.

These problems are difficult enough, but India suffers from a greater failure,
one that is worse than the sum of the symptoms we note. At heart, the economic
leadership of the nation in nearly all political parties is unable to articulate
a vision of development and growth by which even the poor shall benefit. The
vast majority of changes we observe are sops of the 'customs duty' category,
from which only a tiny majority can accrue any immediate reward. The loosening
of the License Raj's chains too is only at the top, where clearances for massive
projects - often ones that have enormous social and economic consequences - are
passed with little scrutiny, usually under the argument that rapid development
is 'necessary'.

But necessary for what? The most common answer is that the policy-makers accept
the shortcomings of their efforts vis-a-vis the poor, but insist that there is
no alternative to the paths they offer. I.e., the poor will remain poor for the
foreseeable future, and the nation cannot afford higher investments for their
welfare. Instead, it is hoped that a great expansion of private enterprise will
generate sufficient economic activity - and revenues for the government - that
their needs can eventually be met from these new resources.

But optimism by itself isn't economics. Even a theory of trickle-down rewards
must preserve at least the minimal standards that the poor already experience.
If, in the short run, they are further impoverished or neglected to the point of
death, their eventual upliftment must be seen as a promissory note that cannot
be cashed. Along Gujarat's industrial corridor or Kerala's farmlands, for
instance, improper management of chemicals used in various economic activities
is poisoning the people. The continuing emphasis on large infrastructure
projects has already displaced millions into the urban slums, and more such
displacement is planned, nearly always without adequate scrutiny. How can the
victims of such policies hope for eventual succour or prosperity? This question
remains off the table.

This is the inevitable consequence of unimaginative policy which promises great
things in the future but is woefully short on delivering much in the near term.
I recall a conversation with Vijay Kelkar some months ago where he expressed
happiness that all the political parties had come to agreement that the fiscal
deficit would be erased by 2008. This, at a time, when the fiscal deficit is
running in the neighbourhood of 10%, the kind of figure one typically associates
with failing Latin American economies. My question to him then was this: can we
expect to see that next year's budget will close a
quarter of the gap, and a quarter more the following year, and so on? Or must we
believe that continuing careless management of the economy will suddenly yield
to prudence in 2008? His diplomatic answer is about to meet its first test in
the next few weeks, with the budget looming.

If, in the short run, the poor are further impoverished to the point of death, their eventual upliftment must be seen as a promissory note that cannot be cashed.

In endless fear of stalling the engine they believe will pull the economy
along, the nation's economic helmsmen have unhinged the carriages it is meant to
pull. Naturally, therefore, they point to the towers of smoke billowing from
their engine, and assure us that the power to re-engage the train is mounting.
This assurance would be more credible if they had strategically disengaged the
carriages themselves, and set precise measures by which to reconnect the
derailed bogies. Unfortunately, this is not the case; instead, with a
combination of shock and disregard, they merely find the carriages unexpectedly
disengaged, and now insist that this is perfectly in line with their planning.

If freer markets are to be the underpinning of our hopes for the future, let us
have an open dialogue about its merits. Why must we hope for investments in
private enterprise to eventually yield gains for all, but cannot mandate state
investments in schools and health centres that have immediate employment
benefits as well as long-term competitive advantages for the nation? Why is
economic freedom a thing to be celebrated in the media, if its arguments do not
apply to New Delhi and the state capitals who stubbornly refuse to yield any
economic authority to local panchayats? Why is the interest rate on capital
projects more important than the usury that millions of small borrowers face?

On the trade front too, let us ask more self-serving questions. Let us ask why a
nation like India - with an abundance of cheap labour - does not demand greater
mobility for its people to other places? Why must it be ok for cotton grown in
the Deccan to be spun in Coimbatore, packaged in Chennai, and shipped from
Vishakapatnam to be sold by retailers in Brussels and Houston, but none of the
participants in the creation of the product may themselves travel to those lands
to wend their wares? Why must our agriculture - still the largest part of our
economy - remain struck down by subsidies in rich nations, even as we open ever
more industries to foreign enterprises? If the answers are political, let us
confront them on those terms, rather than continue with the make-believe
economics.

Our economic and political leaders do not have much faith in the free market, or
in trickle-down economics, despite their apparent support for both. Their
espousal of these remains limited to their potential for immediate political
gains, and in economic terms alone is quite indefensible by them. As a result,
therefore, what passes for economic planning begins by conceding that the rich
must benefit first, and only thereafter can the rest hope to piggyback on their
gains. Worse still, even the increased opportunities for investment by large
business houses is not tied to proper regulation of their activities, or to
welfare measures that protect the poor's current standards at least.

Hold your breath, or demand better. This can't last.

Ashwin Mahesh

01 Jan 2004

Ashwin Mahesh
is a co-founder and editor at India Together,
and a regular columnist with rediff.com. His other interests include the
quantitative analysis of cricket data with Third Slip.